Corporate Management:

  • Berle and Means: corporate powers are power of trust
  • Characteristic of public company: (1) diffuse shareholders; (2) delegation of power to executive directors or executive director committees; (3) principal mechanism, which operates to vest power in mangers, is proxy system; majority shares given by proxy to incumbent managers to be voted as they deem in best interest of company; (4) average shareholder has little to say (change to this is institutional investor, stock exchange)
  • Characteristic of small companies: (1) restriction on transferability of shares (to present intrusion of undesirable business associates, to preserve interest of owners, to resolve deadlock or as controlling device
  • Several types of pre-emptive rights clauses: (1) absolute restriction, (2) consent restriction, (3) first option, (4) event option, (5) buy sell agreement
  • Buy/Sell agreement: agreement b/w all shareholders; provides on death of shareholder, executors obliged to sell shares to remaining shareholders at specified price, shareholders obligated to purchase shares when offered
  • Other characteristics of small companies (2) principal or sole source of income of shareholders derived from company itself; (3) statutory requirements for directors and shareholders meetings filing of documents, registers are relaxed; elaborate machinery designed to prevent fraud, to enable minority shareholders to be kept informed often ignored
  • Characteristic of holding or subsidiary company: company able to control, materially influence management of another com; able to nominate, control board of other com; threat of potential conflict of interest, duty confronting nominee directors; conflict of interest b/w holding, and subsidiary company
  • Characteristics of Joint Venture Companies:temporary partnership to conduct joint undertaking

Board of directors: though elected by shareholder, answerable only to institutional principal, company; sovereignty of directors limited by powers placed on them by Art of Assn in Belize, Jam, and bylaws in new law jurisdictions; in memo jurisdictions, decision of allocation of management power vested in shareholders by virtue of control of arts of assn, thru section 20 com; in new law jurisdictions bylaws are source of directors power, bylaws regulatory in nature

  • Function of board: (1) establishing basic objectives, corporate strategies, policies; (2) power of selection

Delegation to non-director executives

Distinction b/w delegation to managing director and non-director; non-director executives appointed w/ well-defined, limited responsibility; not members of board, not entitled to attend board meetings

  • S448 BCA: director “person occupying position of director by whatever name called;” attempted delegation of wide ranging or exclusive powers by board to person would elevate them to status of director
  • Possibility that appointment of non-director executive considered ultra vires board
  • Horn v Faulder; P, non-director officer, given contract to manage section of com for 14yrs; contract stated management not to be interfered w/ board; opposing counsel argued provision in article: directors shall have supreme control of management, affairs of com; court: such wide ranging delegation always invalid

Shareholders’ meetings:AGM statute requires com hold AGM once per yr (Bel s54, Barb s105); business at AGM includes: (1) declaration of dividend; (2) consideration of accounts, reports of dir, auditors; (3) election of dir; (4) remuneration of auditors

  • Penalty imposed for not holding AGM (St Kitts s88 fine of $2500; Bel $250l; Jam $100; dirs personally liable; members can petition court for order that meeting be convened
  • Notice Barb s111: members to receive 7dys notice of time, place, general nature of agenda; failure of notice renders meeting, subsequent appointment invalid Knight v Knight
  • Tiessen v Henderson: notice, agenda failed to disclose that one director had strong financial interest in proposed scheme for reconstruction; court held subsequent resolution invalid as material facts not disclosed
  • Notice must be full, not misleading (Baille); omission of material fact notice misleading

Power of the company in the AGM:ordinary resolution may ratify act of dir, which is in powers of com, but beyond competence of dir; general management of company vested in dir s58; com in GM have no power by ordinary resolution to invalidate board’s business decisions (Automatic Self-cleaning Filter Syndicate Co. v Cunningham)

Extraordinary general meeting:Jam s127, Barb s129, T&T ss113-114; shareholders may call special GM; must control 1/10 of shares; problem: may not know other shareholders, may not hold 1/10; they must also pay for meeting Re Winward Island Enterprises

  • Creditors’ meetings: Jam s133(2) statutory provision made for compromise or arrangement b/w company and creditors

Records:registers, records required to be prepared, maintained under all corporate statutes; shareholders, creditors entitled to inspect; the records.

  • Right of inspection ceases if com in liquidation; minutes are not exclusive evidence of what took place at meeting, prima facie evidence which can be rebutted by evidence of persons present (Bartlett v Bartlett)

Voting mechanisms

Cumulative voting:important tool to ensure corporate democracy; where bye-laws provide, shareholders entitled to cast a number of votes equal to number of votes attached to shares held by him multiplied by number of directors to be elected; he can cast all such votes in favour of one candidate or distribute them among candidates

  • Right given to shareholders in Bar under s64; system controversial; main arguments in favour: (1) fairest system enabling minority shareholders to attain representation in proportion to their shareholding; (2) principle of majority rule continues to operate; (3) minority or special interest groups have voice on board; (4) minority can protect itself against potential squeeze plays
  • Arguments against: (1) election of partisan directors, incompatible w/ basic function of board to represent company; (2) disharmony on board; (3) potential conflict of interest; partisan director may divulge info harming com; (4) large companies, exercise of voting rights by cumulative system often prelude to battle for control; minority may sometimes gain control if majority fail to cumulate votes properly

Takeovers and Mergers: where company acquires control over another by buying all or majority holding of shares

  • Threat of TO powerful spur towards efficiency in management of companies; inefficient managers can be removed by shareholders accepting TO bid induced by poor performance, consequent reduction in stock value
  • Classification: (1) horizontal TO; acquisition of another com in direct competition in same market; vertical TO: one firm acquiring another firm at different stage in production process; conglomerate mergers/TOs: extends com product range or geographical reach
  • TO may be hostile or consensual
  • Duty of directors (1) to act honestly, in good faith in best interest of company; (2) to act w/ care, diligence, skill of prudent man operating w/in same circumstances (directors may be placed in conflict of interest, may loose job if takeover succeeds – term “in interest of company” unclear
  • No duty is owed to the employees.

TO defensive strategies: primarily to gain time

  • Litigation; media (dirty campaigning); White Knight: where target com exchanges shares w/ friendly com who are invited to assume major ownership, position in target com; diluting or watering down overall shareholding of raider (difficulty is that power to issue shares must not be used for improper purpose Hogg v Cramphorn); lock up stock option
  • Manipulation of Art or Memo to prevent acquisition of shares

Response of management to takeover

  • Pure passivity rule: target directors should refrain from defensive tactics, leave it to shareholder to decide whether to sell
  • Modified passivity rule: target directors allowed to solicit rival bids, engage in propaganda but nothing more
  • Differential regulation principle: more complex defence, more complex rule, i.e. different defences governed by different rules
  • Primary purpose rule: distinct from business judgment rule
  • Proper purpose rule: dominant approach in Car; if target management can establish that particular response pursued for primary purpose of implementing legitimate corporate object, action cannot be challenged; approach based on fiduciary duties of management (Teck Corp Ltd v Millar):
  • Directors must act bona fide in best interest of com
  • Dir must exercise powers for particular purpose for which they were conferred, not for some extraneous purpose
  • They must not fetter their discretion
  • They must not w/out consent of com place themselves where there is conflict b/n their duties, personal interest

Nominee directors:persons who, independent of method of appointment but who, in relation to office, are expected to act in accordance w/ some understanding or arrangement which creates obligation or mutual expectation of loyalty to some person or persons other than company as whole (dir are not beholden to any group, but to com on whole – nominee dir’s obligation invalid)

Interlocking director:dir who sit on more than one board; inter-corporate cohesion, interdependence; produce conflict of interest

  • Reasons given for nominee, interlocking directorships unconvincing when balanced against potential conflict breach of duty
  • Disadvantages (1) elimination of competition b/n two companies; (2) preferential treatment, restrictive trade practices where supplier to other com;
  1. An interlock between manufacturing corporations, banks and insurance companies may establish community of interest that would assure adequate credit to a favourite company and the withholding of credit and capital from disfavoured competitors.
  2. Where a director serves on boards of different corporations he owes fiduciary duties and obligations to more than one company. There is a narrow problem that the interest of stock holders may be subordinated to the opportunity for personal gain.
  3. It may result in the deterioration of service on the boards of companies.

Are these regulations practical? Can we check and verify every transaction to ensure that they are in accordance with the regulations? Do we have the resources to determine whether these linkages are present?